Bearish? Try Inverse Equity ETFs to Short the Markets

We get it. Markets have been in a tizzy since early October, and investors have been in a heightened state of alert. Market volatility has risen sharply, and stock prices have been quick to plunge. Though we don’t tend to be market bears, there are times when being short the market can be advantageous. One of the best ways to do this is through the use of inverse equity ETFs. These are tradable exchange-traded funds that give you a short market position when you buy them.

Faltering Fundamentals

A lot of fundamental factors have been contributing to the market turbulence. A few of the main factors include slowing global economic growth, the threat of a recession on the horizon, and a brewing trade war between the U.S. and China. These are not conditions that just go away that easily.

Tanking Technicals

Technically, we wrote yesterday about the dreaded Death Cross on the S&P 500 that just formed in the past week. In fact, death crosses have already also formed on the Russell 2000 small cap index as well as on the Nasdaq Composite. The Dow has not yet seen this pattern for now, but it may just be a matter of time.

Enter Inverse Equity ETFs

If you’re going to short a bearish market, a couple of the best ways to do so include buying puts on market index ETFS (like SPY, QQQ, DIA, IWM, or the like), and buying inverse equity ETFs.

Here, we provide some of the most heavily traded and liquid inverse ETFs that short the major stock indexes. The chart above shows five of these inverse index ETFs, with current price (as of the 12/7/2018 market close) and performance since early October (when the latest market plunges began) labeled on the y-axis.

You’ll notice that there is one ETF – SQQQ – that has far outperformed others in the current market downturn. That’s simply because it is both inverse and leveraged three times, or -3x. The other four ETFs are all inverse and non-leveraged, or -1x. We would urge more caution than usual when trading leveraged ETFs (2x or 3x), as both losses as well as gains are magnified with leverage. With that said, here are our top picks for inverse equity ETFs, with leverage and total assets also listed:

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Past performance is not indicative of future results. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart